28 Words to
Redefine Corporate DutiesThe Proposal for a Code for
Corporate Citizenship

Over the past 120 years, state and federal governments have enacted volumes
of laws and regulations to curb the problem of corporate abuse of the
public interest. Examples include legislation to protect the environment,
eliminate child labor, create equal opportunity, increase workplace safety,
limit anti-competitive behavior and protect the public interest in numerous
other ways which corporations have been unwilling or unable to do voluntarily.
Notwithstanding all this legislation, the damage that continues to be
inflicted is more extensive than ever.

Part of the reason for this ongoing damage is that such legislation
only addresses where and how much companies should be allowed to damage
the public interest, rather than eliminating the reason why they damage
it. The "where and how much" approach is a little like trying to cure
a disease by treating the symptoms. The patient feels better for a while,
but soon the disease returns, sometimes in a more virulent form. In order
to cure the disease of corporate abuse of the public interest, its cause
must be understood and either changed or eliminated.

The cause of most corporate abuse is no secret. The thing that keeps
greenhouse gases pouring out of smokestacks and tailpipes is the same
thing that results in vendors of designer sneakers paying Third World
children less than a dollar an hour. It's also the same thing that keeps
tobacco companies marketing their products to children, fast food companies
paying less than a living wage and meat packing companies maintaining
dangerous working conditions. That thing is the dedication of the corporation
to the pursuit of profit.

Under the corporate law, corporations are established for one purpose
-- to make money for shareholders. This purpose is included in the law
as a duty imposed upon directors and is sometimes called the doctrine
of "shareholder primacy." Failure to satisfy this duty can result in directors
being sued by shareholders. As a result of this duty, the purpose of the
corporation becomes the marching orders for everyone who works for the
corporation. Very little, if anything, happens in the corporation that
does not have this goal in mind.

Professor Lawrence Mitchell at George Washington University Law School
has said that this dedication of the corporation to the pursuit of profit
has the effect of requiring people who work for the corporation to give
up a part of their personhood when they become a director, manager or
employee. They must play roles where the only thing that matters is making
more money.

Corporations act through their employees. Consider the likely result
of dozens if not hundreds of employees acting together under pressure
to produce a profit and with no concern for the public interest (other
than not doing what their legal departments tell them is specifically
prohibited). Then factor in millions or billions of dollars of capital
backing this collective action. The natural result is shortcuts being
taken that increase the corporation's bottom line, but damage the public
interest on a grand scale.

As long as directors, managers and employees are guided only by the
doctrine of shareholder primacy, their companies will continue to do damage
to the environment, human rights, the public health and safety, the dignity
of employees and the welfare of their communities. As long as companies
continue to grow in size, such damage will become more extensive right
along with it.

The Code for Corporate Citizenship
The doctrine of shareholder primacy has been a part of the corporate law
from the time corporations were first invented, but it does not have to
continue for eternity.

Corporations are now among the most powerful institutions in our society.
They have virtually all of the rights of individual citizens, but have
no respect for the obligations of citizenship. This makes no sense.

Many people are shocked when they hear the results of a Business Week/Harris
poll which asked people in the United States which of the following
two statements they agreed more strongly with:

"Corporations should have only one purpose -- to make the most profit
for their shareholders -- and pursuit of that goal will be best for America
in the long run."

-or-

"Corporations should have more than one purpose. They also owe something
to their workers and the communities in which they operate and should
sometimes sacrifice some profit for the sake of making things better
for their workers and communities."

An overwhelming 95 percent chose the second proposition. In other words,
they rejected the doctrine of shareholder primacy (which is the current
law) in favor of a system where profits should be sacrificed in order
to protect the interests of workers and communities (which, reasonably
understood, includes both the environment and people outside the corporation
such as customers).

Corporations only exist because state legislatures, the elected representatives
of the people, have passed laws allowing corporations to be formed and
be recognized. These laws can be changed.

What are we waiting for? Let's change the law to reflect what the vast
majority of people want, eliminating the doctrine of shareholder primacy.
This can be accomplished by adding 28 words to the duty of directors to
make money for shareholders,

... but not at the expense of the environment, human rights, the public
health or safety, the communities in which the corporation operates
or the dignity of its employees.

This simple Code for Corporate Citizenship balances the rights of citizenship
that corporations already have with obligations of citizenship that they
have been able to avoid.

How it Will Work
The Code will require directors to ensure that profits do not come at
the expense of five elements of the public interest: (i) the environment,
(ii) human rights, (iii) public health and safety, (iv) the welfare of
communities and (v) employee dignity. It will impose strict liability
on companies and their directors that violate the Code.

After enactment of the Code, companies will have to run their operations
so they do not pollute and do not manufacture products that pollute. No
longer will they be able to engage in development or the harvesting or
extraction of the earth's natural resources that is not sustainable.

In addition, companies will no longer be allowed to violate human rights
in the Third World. Nor will they be allowed to put untested unsafe products
in the marketplace. If an unsafe product does get into the marketplace,
they will be required to warn the public and, if necessary, recall it
at the first sign of a problem (rather than wait until hundreds of people
have been injured or killed).

The Code will also give employees and communities more leverage to deal
with corporations. At a minimum, the Code will guarantee a living wage,
the right to collectively bargain and the right to work in a safe environment.
In fact, the Code may change many employers' attitudes towards unions.
Such employers may actually encourage union participation so they can
enter into collective bargaining agreements that are assured of complying
with the Code.

Finally, no longer will a major employer in a community be able to threaten
to leave town unless the community accedes to the company's demands. Companies
that create economic hardship will be responsible for compensating the
community for the damage they cause. This may cause companies to negotiate
with towns prior to making a plant closure decision and factor into that
decision the cost of such compensation. This may or may not result in
fewer closures, but it will put a stop to closures where the local community
is left to pick up the pieces on its own.

Enforcement
By addressing why corporations damage the public interest, the Code works
quite differently from "where and how much" legislation. Rather than prohibiting
specific behavior, the Code imposes open-ended duties on corporate directors
that require them to ensure their companies do no damage to the environment
and four other elements of the public interest. In addition, because it
is imposed as part of the corporate law, it governs the corporation (and
its subsidiaries) worldwide, not just on a case-by-case basis in local
jurisdictions where the company has its various operations.

Under U.S. federal securities laws, investors can bring private lawsuits
against a company and its directors for losses incurred as a result of
the company's false and misleading statements irrespective of the company's
intent or motive in making such statements. The Code can be enforced in
a similar manner.

In addition to the 28 words eliminating shareholder primacy, the Code
should include a provision allowing it to be enforced by private lawsuits
brought against the company and its directors by any member of the public
that is damaged. Private litigants would have the ability to band together
and bring class actions. It is likely they would be supported by attorneys
willing to accept cases on a contingency basis. The attorney general would
also have the right to bring suit to enforce the Code on the public's
behalf, including obtaining injunctions to halt prohibited corporate behavior
and criminal sanctions for intentional violations.

The threat of civil litigation and possible criminal sanctions will
serve as a powerful deterrent to violating the Code. It will cause directors
to change the way they run their companies, much the way the securities
laws that were passed in the 1930s caused them to change the way they
offered securities to the public and distributed information to investors
on an ongoing basis. They will become much more cautious.

Being able to win lawsuits under the Code will not be good enough for
directors. Having to defend such suits is a time-consuming, expensive,
hair-raising pain in their collective necks. To avoid this, directors
will order their managers to operate the company clearly within the boundaries
of the Code. For them, an ounce of caution will be well worth a pound
of cure (successfully defending a lawsuit).

Notwithstanding the doctrine of shareholder primacy, the Code will not
be the first change to the corporate law that recognizes that certain
things can be more important than increasing the financial return of shareholders.
In response to the explosion in the number of hostile takeovers during
the 1980s, 35 states passed amendments to the doctrine of shareholder
primacy (sometimes called stakeholder statues) that allow directors to
consider the rights of parties other than shareholders (and sometimes
sacrifice the financial interests of shareholders) in order to justify
the rejection of a hostile takeover offer.

The Code takes this idea one step farther. It makes consideration of
the public interest mandatory 365 days a year (not just in the event of
a takeover). If directors can consider the environment and the rights
of others when their company is under a takeover threat (and their jobs
as directors are at risk), why can't they always consider such factors?

Making it Law
For the Code to become law, it will need to be passed in every jurisdiction
where the doctrine of shareholder primacy currently exists. In the United
States, that is in every state.

This is not as complicated as is may sound. States amend their corporate
law quite regularly. The doctrine of shareholder primacy exists either
in the statutes or case law of every state in essentially the same form.
The change in every state will be more or less identical.

Moreover, the Code is simple. Its essence can be boiled down to a phrase
at the end of the obligation to make money that every director, manager,
employee or even school child can understand -- some things take precedence
over making money, and making money and safeguarding the environment,
human rights, the public health and safety, the welfare of our communities
and the dignity of employees do not have to be mutually exclusive.

Even after passage of the Code, it will take some time before large
corporations come into full compliance. Billions of dollars are invested
in technologies that damage the public interest. Existing management systems
are well entrenched. This momentum must be slowed before it can be turned
around. It will take some time.

The Code should be passed with provisions that contemplate a 10- or
15-year transition period. This transition period will allow all states
and many foreign jurisdictions to effectively implement the Code at the
same time. And, it will avoid making opponents of the Code of those that
would otherwise support it but for their inability to comply with it immediately.

During the transition period, the Code would fully apply except that
the enforcement provisions would not be effective. In this way, the Code
would serve as a statement of what is expected of corporations -- encouraging
them to make progress re-tooling their plants and changing their management
systems to be in full compliance by the time the enforcement provisions
become effective.

What it Means
Until now, the public and/or employees have borne the cost of anti-social
corporate behavior. Externalized costs do not appear on the corporation's
profit and loss statement, so they do not have to be addressed by corporate
directors or managers. For example, as long as a company is able to comply
with "where or how much" environmental laws, it can pollute as much as
those laws allow. The cost of dealing with that pollution becomes a social
cost that the public has to deal with, but not the company.

The Code will bring these costs inside the corporation. Some will charge
that this will decrease corporate profits, but that is not necessarily
the case. In order to increase their competitiveness, corporations will
look for ways to reduce these costs. This should open a virtual floodgate
of investment in research and development designed to find ways that less
expensively protect the environment, improve product testing and enhance
management practices. Although not contemplated by the Code, government
incentives and subsidies could be provided to offset the cost of such
investment.

Rather than be considered as a restriction on corporate management,
many managers will find the Code liberating. At last, they will be empowered
to operate their business in a way that is more in line with their own
behavior away from work -- protecting the public interest, not destroying
it.

The Code does not destroy the profit motive, but it does eliminate the
doctrine of shareholder primacy. It says that corporations should behave
the way the vast majority of the public want them to -- sometimes sacrificing
the interests of shareholders in order to protect workers and the community.

No one should feel bad for shareholders in supporting the Code. Ultimately,
all shareholders are people. The financial institutions (e.g., mutual
funds, 401(k) plans, insurance companies, etc.) that hold most of the
shares in U.S. companies do so on behalf of real people.

The Code will benefit these shareholders in ways that increased profits,
dividends and share prices cannot -- through a better environment, improved
public health and safety, better treatment for workers and stronger communities.
Imagine a world 15 years from now where corporate pollution has been eliminated,
every employee is paid a living wage and human rights are fully respected.

By finally addressing the reason why corporations abuse the public interest,
the Code can be a first step towards making these things happen.

Robert C. Hinkley has been a corporate lawyer for
more than 20 years. In June 2000, he resigned his partnership at Skadden,
Arps, Slate, Meagher & Flom LLP in order to devote more time to promoting
the Code for Corporate Citizenship.